Highlights of the ITC Report on the USMCA's "Likely Impact on the U.S. Economy and on Specific Industry Sectors"

Here's the headline number from today's ITC report on the impact of USMCA:

The Commission’s model estimates that USMCA would raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent). The model estimates that USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world. ...

And here's what they looked at:

The first category is the set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect. This category includes provisions that apply to agriculture, automobiles, IPRs, e-commerce, and labor, as well as investment provisions related to the investor-state dispute settlement (ISDS) mechanism. The second category is the set of provisions representing commitments that would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive. The provisions included in this second category are those addressing international data transfer, cross-border services trade, and investment issues related to market access and nonconforming measures.

They didn't take into account the Sunset Clause or related review provisions:

Another change that USMCA would bring are its complex termination, review, and extension provisions. Witnesses at the Commission’s public hearing disagreed on whether and to what extent the review and termination provisions would be viewed as adding uncertainty. Given this lack of clarity and the paucity of economic research on the likely effects of such provisions, these were not included in the Commission’s model.

On autos, the ITC says: More auto parts production in the US, less auto production in the US, and reduced utilization of tariff preferences and therefore higher auto prices (pp. 18-19):

This model estimates that USMCA’s automotive ROOs would increase employment in the U.S. automotive industry by more than 28,000 FTE employees, as the gain of nearly 30,000 jobs in parts production would far exceed the approximately 1,500 jobs lost in the vehicle production segment. Further, the model estimates an increase in U.S. investment of $683 million per year to meet new demand for U.S.-produced engines and transmissions. The Commission’s model also estimates that prices for all vehicles would undergo a modest increase (ranging from 0.37 percent for pickup trucks to 1.61 percent for small cars), and that total consumption in the United States would decline by over 140,000 vehicles. Finally, some manufacturers may decide not to offer vehicles that would be too expensive to bring into compliance, which would ultimately decrease consumer choice.

Here's something on services (p. 22):

The broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.

...

Interactive computer services firms are likely to benefit from intermediary liability protections provided in USMCA’s digital trade chapter. U.S. businesses that provide telecommunications (telecom) services to multinational corporations, governments, and other large enterprises are likely to benefit from enhanced regulatory and interoperability provisions in the telecom chapter of the agreement.

No numbers given here though.

And here's agriculture (p. 22):

USMCA would have a positive impact on the U.S. agriculture sector. The combined effect of all USMCA provisions would increase total annual U.S. agricultural and food exports by $2.2 billion (1.1 percent) when fully implemented. A Commission simulation that considered only the effects of the agriculture market access provisions in USMCA showed increased U.S. agriculture and food exports to the world of $435 million.

There's this on digital trade (p. 23):

... USMCA’s provisions that reduce policy uncertainty regarding international data transfers and data localization are estimated to have a significant, positive impact on industries that rely on cross-border data flows. ...

I'm not sure this really applies as between Canada, Mexico, and the U.S., where the situation might not change much.

And there are gains from raising customs de minimis thresholds (p. 24):

Many U.S. industries are expected to benefit from increases in the de minimis thresholds in Mexico and Canada that would simplify and hasten customs clearance procedures for many moderate-value packages while lowering the costs of expedited deliveries. Quantitative analysis estimates that higher thresholds would increase the value of U.S. e-commerce exports by $332 million to Canada and by $91 million to Mexico.

The ISDS part is really interesting (p. 25):

According to the Commission’s quantitative analysis, U.S. investment in Mexico and the activity of its foreign affiliates there, except for in the five sectors listed above, is expected to be reduced as the result of the changes in ISDS provisions. The Commission’s quantitative analysis also shows that the reduction in the scope of ISDS would have a small positive effect on the U.S. economy. In particular, U.S. domestic manufacturing and mining output is estimated to increase due to greater amount of capital available in the United States for investing in such industries because of reduced investment in Mexico.

The notion that ISDS/investment protection encourage cross-border investment is something that many ISDS supporters seem to believe, although every businessperson I have ever asked about this says very clearly that the existence of ISDS has no impact on investment decisions.

On labor (p. 25):

The Commission’s quantitative analysis of the collective bargaining commitments in Mexico estimates that these provisions would increase Mexican union wages by 17.2 percent, assuming that these provisions are enforced.

That's a big number!

And on IP:

The Commission’s quantitative assessment of the effects of the IPR chapter identifies the statistical relationships between trade in certain IPR-intensive sectors and increased IPR protections under the agreement, and incorporates the results into an economy-wide model as ad valorem trade cost equivalents. Of the IPR-intensive sectors considered for analysis, two—scientific and analytical instruments and medical devices—exhibit a statistically significant positive relationship between trade flows and IPR protections. The lack of significant findings for other sectors is consistent with written submissions and testimony before the Commission to the effect that in some industries, such as biopharmaceuticals, estimated gains to originator (first-to-market) firms from stronger IPR protections are offset by losses to follow-on or generic firms.

I'm not sure what to make of this one.

That's all for the highlights. I'm going to dig a little deeper on some of the issues in subsequent posts.

Comments

Highlights of the ITC Report on the USMCA's "Likely Impact on the U.S. Economy and on Specific Industry Sectors"

Here's the headline number from today's ITC report on the impact of USMCA:

The Commission’s model estimates that USMCA would raise U.S. real GDP by $68.2 billion (0.35 percent) and U.S. employment by 176,000 jobs (0.12 percent). The model estimates that USMCA would likely have a positive impact on U.S. trade, both with USMCA partners and with the rest of the world. ...

And here's what they looked at:

The first category is the set of provisions that would alter current policies or set new standards within the three member countries, and that would therefore be expected to modify current conditions after USMCA enters into effect. This category includes provisions that apply to agriculture, automobiles, IPRs, e-commerce, and labor, as well as investment provisions related to the investor-state dispute settlement (ISDS) mechanism. The second category is the set of provisions representing commitments that would reduce policy uncertainty. These commitments would primarily serve to deter future trade and investment barriers, thus offering firms some assurance that current regulations and standards, which may or may not be expressly governed by current policies, will not become more restrictive. The provisions included in this second category are those addressing international data transfer, cross-border services trade, and investment issues related to market access and nonconforming measures.

They didn't take into account the Sunset Clause or related review provisions:

Another change that USMCA would bring are its complex termination, review, and extension provisions. Witnesses at the Commission’s public hearing disagreed on whether and to what extent the review and termination provisions would be viewed as adding uncertainty. Given this lack of clarity and the paucity of economic research on the likely effects of such provisions, these were not included in the Commission’s model.

On autos, the ITC says: More auto parts production in the US, less auto production in the US, and reduced utilization of tariff preferences and therefore higher auto prices (pp. 18-19):

This model estimates that USMCA’s automotive ROOs would increase employment in the U.S. automotive industry by more than 28,000 FTE employees, as the gain of nearly 30,000 jobs in parts production would far exceed the approximately 1,500 jobs lost in the vehicle production segment. Further, the model estimates an increase in U.S. investment of $683 million per year to meet new demand for U.S.-produced engines and transmissions. The Commission’s model also estimates that prices for all vehicles would undergo a modest increase (ranging from 0.37 percent for pickup trucks to 1.61 percent for small cars), and that total consumption in the United States would decline by over 140,000 vehicles. Finally, some manufacturers may decide not to offer vehicles that would be too expensive to bring into compliance, which would ultimately decrease consumer choice.

Here's something on services (p. 22):

The broadcasting, telecommunications, and courier services sectors in the United States are estimated to gain the most, followed by the commercial banking sector in all three countries.

...

Interactive computer services firms are likely to benefit from intermediary liability protections provided in USMCA’s digital trade chapter. U.S. businesses that provide telecommunications (telecom) services to multinational corporations, governments, and other large enterprises are likely to benefit from enhanced regulatory and interoperability provisions in the telecom chapter of the agreement.

No numbers given here though.

And here's agriculture (p. 22):

USMCA would have a positive impact on the U.S. agriculture sector. The combined effect of all USMCA provisions would increase total annual U.S. agricultural and food exports by $2.2 billion (1.1 percent) when fully implemented. A Commission simulation that considered only the effects of the agriculture market access provisions in USMCA showed increased U.S. agriculture and food exports to the world of $435 million.

There's this on digital trade (p. 23):

... USMCA’s provisions that reduce policy uncertainty regarding international data transfers and data localization are estimated to have a significant, positive impact on industries that rely on cross-border data flows. ...

I'm not sure this really applies as between Canada, Mexico, and the U.S., where the situation might not change much.

And there are gains from raising customs de minimis thresholds (p. 24):

Many U.S. industries are expected to benefit from increases in the de minimis thresholds in Mexico and Canada that would simplify and hasten customs clearance procedures for many moderate-value packages while lowering the costs of expedited deliveries. Quantitative analysis estimates that higher thresholds would increase the value of U.S. e-commerce exports by $332 million to Canada and by $91 million to Mexico.

The ISDS part is really interesting (p. 25):

According to the Commission’s quantitative analysis, U.S. investment in Mexico and the activity of its foreign affiliates there, except for in the five sectors listed above, is expected to be reduced as the result of the changes in ISDS provisions. The Commission’s quantitative analysis also shows that the reduction in the scope of ISDS would have a small positive effect on the U.S. economy. In particular, U.S. domestic manufacturing and mining output is estimated to increase due to greater amount of capital available in the United States for investing in such industries because of reduced investment in Mexico.

The notion that ISDS/investment protection encourage cross-border investment is something that many ISDS supporters seem to believe, although every businessperson I have ever asked about this says very clearly that the existence of ISDS has no impact on investment decisions.

On labor (p. 25):

The Commission’s quantitative analysis of the collective bargaining commitments in Mexico estimates that these provisions would increase Mexican union wages by 17.2 percent, assuming that these provisions are enforced.

That's a big number!

And on IP:

The Commission’s quantitative assessment of the effects of the IPR chapter identifies the statistical relationships between trade in certain IPR-intensive sectors and increased IPR protections under the agreement, and incorporates the results into an economy-wide model as ad valorem trade cost equivalents. Of the IPR-intensive sectors considered for analysis, two—scientific and analytical instruments and medical devices—exhibit a statistically significant positive relationship between trade flows and IPR protections. The lack of significant findings for other sectors is consistent with written submissions and testimony before the Commission to the effect that in some industries, such as biopharmaceuticals, estimated gains to originator (first-to-market) firms from stronger IPR protections are offset by losses to follow-on or generic firms.

I'm not sure what to make of this one.

That's all for the highlights. I'm going to dig a little deeper on some of the issues in subsequent posts.